Bihar Board 12th Business Economics Important Questions Short Answer Type Part 3 in English

Bihar Board 12th Business Economics Important Questions Short Answer Type Part 3 in English

BSEB 12th Business Economics Important Questions Short Answer Type Part 3 in English

Question 1. Explain the law of diminishing marginal utility with the help of a total utility schedule.
Answer: Law of diminishing marginal utility states that as more and more units of a commodity are consumed continuously, marginal utility derived from the additional unit declines.

As a person starts consumption of a commodity to satisfy his wants, its intensity begins to decline and the commodity under consideration becomes less and less useful. If the process of consumption is continued for sometimes, eventually (ultimately) a stage is reached where the consumer does not get any utility from the consumption of an additional unit of that commodity. As consumer still continues with the consumption of the commodity he will develop dislike for the commodity and will derive a negative marginal utility from subsequent units that he decides to consume.

Units of commodity (x)	Mux
1  2 3 4 5 6 7	50  40 30 20 10 0 -10

The above table reveals that as the consumer consumes more of commodity x the Mu diminishes.

Question 2. Give the meaning of nominal GDP and real GDP which of these is the indicator of economic welfare and why?
Answer: Nominal GDP values the current year’s output in an economy at current year price. Real GDP values the current year’s output in an economy at a set of constant price.

Real GDP is the indicator of economic welfare because it shows the quantity of gopds and services made available to the society during the year.

Question 3. Machine purchased is always a final good. Do you agree? Give reasons for your answer.
Answer: Whether machine is a final good or not depends on how it is being used. If the machine is bought by a household, then it is a final good. If the machine is bought by a firm for its own use then also it is a final good. If the machine is bought by a firm for reselling then it is an intermediate good.

Question 4. Explain the effect of depreciation of domestic currency on exports.
Answer: Domestic currency depreciates when there is rise in foreign exchange rate. With the rise in foreign exchange rate the domestic currency can now buy more quantity of goods and services from foreign countries from the less amount of domestic currency. As a result imports rise.

Question 5. Explain the effect of appreciation of domestic currency on imports.
Answer: Domestic currency appreciates when there is fall in foreign exchange rate. With the fall in foreign exchange rate the domestic currency can now buy more quantity of goods and services from foreign countries from the less amount of domestic currency. As a result imports rise.

Question 6. Distinguish between the current account and the capital account of balance of payments. Is import of machinery recorded in current account or capital account? Give reasons for your answer.
Answer: The current account records transactions relating to the export and import of goods and services, income and transfer receipts and payments during a year.

The capital account records transactions affecting foreign assets and foreign liabilities during a year.
Since import of machinery is an import of good, it is recorded in the current account.

Question 7. Explain the main Merits of Fixed Exchange Rate.
Answer: The main merits of fixed exchange rate are as follows:

• It ensures stability in exchange rate. The exporters and importers do not have to operate under uncertainty about the exchange rate. Thus it promotes foreign trade.
• It promotes capital movements. Fixed exchange rate system attracts foreign capital because a stable currency does not involve any uncertainties about exchange rate that may cause capital loss.
• Stable exchange rate prevents capital outflow.
• It prevents speculation in foreign exchange market.
• It forces the government to keep inflation in check. In case of fixed exchange rate system, inflation causes balance of payments deficit resulting in depletion of foreign exchange reserves.

Question 8. Write down some of the limitations of using GDP as an index of welfare of a country.
Answer: The limitations of using GDP as an index of welfare of a country are as follows:

• Distribution of GDP, if there is inequality in distribution of GDP, it may not lead to rise in economic welfare as it will result in making the rich richer and the poor poorer.
• If the rate of growth of real GDP is less than the rate of population growth, if may reduce the welfare of the people in totality.
• GDP will not increase economic welfare if rise in GDP is because of more production of defense/war.

Question 9. Why does the demand for foreign exchange rise when its price falls?
Answer: There is an inverse relation between foreign exchange rate and demand for foreign exchange. Higher the foreign exchange rate lower the demand of a foreign exchange. Suppose the price of 45 Dollar in India falls from Rs. 50 to Rs. 40. It implies American goods have become cheaper for Indian people.

Question 10. Distinguish between depreciation and devaluation.
Answer: When the value of domestic currency in terms of foreign currency or in terms of gold is reduced by an act of the government, it is called devaluation. Where as depreciation refers to the fall in the value of domestic currency in the free exchange market by the changes in the demand and supply.

Question 11. What is balance of payments? Give meaning of trade balance and current account balance.
Answer: Subtraction of the total outflow or spending of foreign exchange by a country from the total inflow of foreign exchange is called balance of payment.

Current account balance: Total of exports and imports of commodities, invisible items and unrequired receipts and payments is called current account balance.

Trade balance: The balance of exports and imports of goods is referred as the trade balance.

Question 12. Distinguish between GDP_MP and GDP_FC
Answer: Difference between GDP_MP and GDP_FC are as follows:

GDPMP	GDPFC
1. It is the market value of all final goods and services within the domestic territory of a country during an accounting year.	1. It is the sum total of all factor income earned within the domestic territory of a country during a given period of time.
2. It includes net indirect taxes.	2. It does not include net indirect taxes.

Question 13. Distinguish between factor payment and transfer payment.
Answer: The difference between factor payment and transfer payment are follows as:

Factor payment	Transfer payment
1. It refers to payment which we get after providing services.	1. Payments which we earn but not after providing services.
2. These are a part of national income.	2. These are not a part of national income.

Question 14. Name two sources of demand for foreign exchange.
Answer: Two sources of demand for foreign exchange are:

1. To send gifts and grants to foreign countries.
2. To purchase goods and services from abroad.

Question 15. What should we do if inflationary gap is rising due to excess demand?
Answer: We should take the following steps to reduce inflationary gap

• We should do optimum utilisation of resources.
• We should use substitute goods in place of that particular good.
• We should not import from foreign country.

Question 16. Explain the meaning of deficit in balance of payments.
Answer: The balance of payments in in deficit if the autonomous receipts are less than autonomous payments. This means that the foreign country has some not claims against the domestic country. There are number of factors that cause disequilibrium to BOPs showing deficit. These causes are

• Large scale development expenditure that may cause large imports and leads to deficit.
• Changes in tastes, preferences and fashion may affect imports and exports and lead to disequilibrium in BOP.

Question 17. Explain the relation between foreign exchange rate and supply of foreign exchange.
Answer: Foreign exchange rate is the exchange rate of two countries. The supply of foreign exchange into the domestic country take place when:

• Foreigners purchase own country’s goods and services.
• Foreign currencies flow into economy due to currency dealers.
• Foreign investment in our country through joint ventures or market operations.
• The flow of foreign currencies into the economy is due to speculators. There is direct relation between price of foreign exchange and the supply of the foreign exchange. Higher the price higher the supply of foreign exchange, and lower the price lower the supply.

Question 18. Distinguish between consumer goods and capital goods.
Answer: Consumer goods: The goods which are used for the direct satisfaction of human wants. Examples, milk used by households, consumer goods arc final goods.

Capital goods: These are fixed assets of the producers which are repeatedly used in the production of other goods and services.

Question 19. State two sources of supply of foreign exchange.
Answer: The two sources of supply of foreign exchange are

1. The domestic exporters who receive payments in foreign currency.
2. The foreigners who invest and lend in the home country.

Question 20. Explain the money creation process creation by commercial banks.
Answer: Credit is defined as finance made available by one party to another party on a certain rate of interest. Credit creation is an important function of commercial banks. Banks have the power to expand or contract demand deposits. This power is known as credit creation.

By virtue of this function, banks are in a position to lend more than what is lent to them. Banks extend loans to needy persons out of their ideal cash reserves. When the commercial banks grants loans, they open an account in the name of the borrower and the loan is deposited in that account.

Thus, commercial banks create credit in the economy.

Question 21. How do changes in bank rates affect money creation by commercial banks?
Answer: The rate of which the central bank of a country the wholesaler of credit lends to the commercial banks, the retailers of credit, is called bank rate. Commercial banks lend credit, to the public at a rate higher than the bank rate. By raising the bank rate, the central bank can directly affect the cost of borrowing by banks and indirectly affects interest rates and credit conditions. By reducing the bank rate, the central bank reduces the cost of borrowing by the banks. This may reduce interest rates and expand credit conditions.

Question 22. Define marginal propensity to consume. Can it ever be negative? If no then give reason.
Answer: Marginal propensity to consume is the proportion of change in total consumption expenditure to change in income. It measures additional consumption as a proportion of additional income change in total consumption.

No, MPC can never be negative because there is a positive creation between income and relation.

Question 23. Distinguish between direct tax and indirect tax. Give an example of each.
Answer: Direct taxes are those taxes which are levied directly on the property and income of persons and are directly paid by the consumers. Example: income tax.

Indirect taxes are those taxes that affect the income and property of persons through the consumption expenditure. In such taxes, the incidence can be shifted. Example: Sale tax.

Question 24. Distinguish between balanced budget and surplus budget.
Answer: Balanced budget: Balanced budget is a budget in which estimated revenue of the government during the year is equal to its anticipated expenditure. Balanced budget is preferable for individuals and family. Now this policy is not preferred.

Surplus budget: Excess of estimated revenue of the year over the anticipated expenditure is known as Surplus budget. It shows the financial soundness of the government. Now-a-days surplus budget is not favoured. Modern governments have assumed so much social, economic and political responsibilities that surplus budget is imposible.

Question 25. Distinguish between development expenditure and non¬development expenditure.
Answer: All those expenditures of government which promote economic growth are called developmental expenditure. Expenditure on irrigation projects, flood control measures, transport and communication, capital formation in agricultural and industrial sectors arc termed as developmental expenditure.

Expenditure on essential general services of the government is called non-developmental expenditure. Expenditure on defence and administration are some of the main examples.

Question 26. Explain the basis of classifying goods into intermediate and final goods. Give suitable examples.
Answer: Production and consumption are the basis of classifying goods into intermediate and final goods.

Intermediate goods are those goods and services which are used in the production process. It is a major past of cost of production, therefore deducted from value of output to calculated value added. Such goods are not ready for consumption, therefore, can be manufactured further.

Final goods are those goods which are ready for sale or cannot be manufactured further. It is the major part of producer’s income which includes cost of intermediate goods and cost of capital consumption.

Question 27. Explain the Banker to government function of the central bank.
Answer: The central bank acts as a banker, agent and financial advisor to the government:
(i) As a banker: Central bank performs the same functions for the govt, as a commercial bank performs for its customers. It maintanins the accounts of the central as well as state govt. It receives deposit from govt, and makes short term advances to the govt.

(ii) As a fiscal agent: The central bank collects taxes and other payments on behalf of the govt. It raises loans from the public and thus manages public debt.

(iii) As a financial advisor: The central bank gives advice to the govt, on economic, monetary, financial and fiscal matters such as deficit financial devaluations, trade policy, foreign exchange etc.

Question 28. Explain the cash reserve ratio and statutory Ihjuidity ratio.
Answer: Cash reserve ratio: All commercial banks are required to keep a part of their total deposits with the central bank in cash form. This is known as cash reserve ratio. This rate of CRR can be changed by central bank from time to time to control inflation or deflation.

Statutory liquidity ratio: This refers to that percentage of the total deposits which commercial banks are required to keep with themselves as liquid assets.

Question 29. What is Equilibrium Price?
Answer: Commodity Price: Demand Supply Equilibrium: Buyer wants to gave the least price while the seller wants to take the maximum price of the commodity. Bargaining takes place between both the parties and at last, the price of commodity is determined at the price where both demand for and supply of the commodity become equal. This price is called ‘equilibrium price’.

In following fig., price determination of the commodity by demand and supply forces has been shown. Demand Curve DD and Supply Curve SS cut each other at point E where price OP is determined. This price OP (or EQ) shows the equilibrium price.

Question 30. Explain the allocation function of government budget.
Answer: Government budget through taxation and public expenditure programmes, can greatly affect the allocation of resources in different sectors on the basis of the performance. It provides more funds to socially productive sectors and draw away resources from a specific sector through heavy taxation. In fact, a budget is a master plan of the government, it is an imperative instrument of economic policy to guide the proper allocation of resources.

Question 31. State the components of money supply.
Answer: There are four components of supply of money:
M₁ = Currency with the public + demand deposits with the banks.
M₂ = M₁ + Saving deposit with post office saving banks.
M₃ = M₂ + Net time deposits of banks.
M₄ = M₃ + Total deposits with post office saving organisation.

Question 32. How can he control the depreciating currency of our economy?
Answer: In the following ways depreciation of currency can be controlled:

• By optimufn utilisation of resources.
• By reducing the rate of investment in foreign country or imports.
• By showing less interest in foreign goods rather than imported goods.

Question 33. Explain the problem of double coincidence of wants faced under barter system. How has money solved it?
Answer: Double coincidence of wants refers to the simultaneous fulfillment of mutual wants of buyers and sellers. In the above example, want for clothing by the farmer coincides with the want of weaver for wheat. However, it is very difficult to find double coincidence of wants in real life. It leads to huge trading costs.

Trading costs refer to the costs of engaging in trade. Trading costs are of two types:
1. Search cost: It refers to physical cost that a person has to incur to search a person with whom he may enter into a barter deal.

2. Disutility of waiting: It refers to discomfort involved in waiting for the appropriate person who is willing to buy what you want to sell and is willing to sell what you want to buy.

Money as a medium of exchange means that it can be used to make payment for all transactions of goods and services. It is the most essential function of money. Money has the quality of general acceptability. So, all exchanges take place in terms of money. This function has removed the major difficulty of lack of double coincidence of wants and inconveniences associated with the barter system.

Question 34. Explain the medium of exchange function of money.
Answer: Money, as a medium of exchange, can be used to make payment for all transactions of goods and services. It is the most essential function of money. Money has the quality of general acceptability. So, all exchanges take place in terms of money. This function has removed the major difficulty of lack of double coincidence of wants and inconveniences associated with the barter systems.

Question 35. Explain the lender of last resort function of centra! bank.
Answer: The central bank also1 acts as a lender of last resort for the other banks of the country. When commercial banks facts to meet their financial requirements from other sources, they can approach the central bank which gives loans and advances as lender of the last resort. Central bank assists these banks through discounting of approval securities and bills of exchange.

Question 36. What is National Income?
Answer: National Income: Net National product at factor cost (NWPFC) is known as National Income (NNPFC) is the sum total of net domestic product at factor cost and net factor income from abroad.

Question 37. What do you mean by Gross National Product?
Answer: Gross National Product (GNP) is defined as the money value of all final goods and services produced in the demostic territory of a country in a year inclusive of net factor income from abroad. Thus
GNP – GDP + Net factor income from abroad.

Question 38. What is Gross Domestic Product?
Answer: Gross Domestic product (GDP) refers to the money value of final goods and services produced during a year and it is inclusive of consumption of fixed capital in a year.

Question 39. What is the difference between Micro and Macro Economics?
Answer: Difference between Micro and Macro Economics are follows as:

Micro Economics	Macro Economics
1. In Micro Economics, economic problems at individual levels are studied, e.g., one consumer, one producer, one firm.	1. Macro Economics studies the economics units of the entire economy, e.g., national income, total consumption, general price level.
2. Individual and individual behaviour is studied in Micro Economics.	2. Society as a whole and its behaviour is studied in Macro Economics.
3. Micro economic analysis assumes macro parameters as constant.	3. Macro Economic analysis assumes micro parameters as constant.

Question 40. Define production possibilities curve. Explain why it is downward sloping from left to right.
Answer: PPC is locus of points representing different combinations of the two goods which the economy can produce from the given resources assumed to be employed fully and efficiency.

A PPC downward slopping because to produce more quantity of one good, the economy must produce less quantity of the other good. It is because resources are fixed.

Question 41. Distinguish between positive economics and normative economics.
Answer: Positive economics: A positive science analyses cause and effect relationship between variables but it does not pass value judgement. In other words, it states ‘what is’ not ‘what ought to be’. Economics should be neutral between ends. A person with his limited income may buy liquor instead of milk, but that is entirely his business and, therefore, it is no concern of the economists to condemn or appreciate this act. Here, ethics of economic decisions are not taken care of. Examples- India faces the problem of terrorism’. ‘Problem of unemployed and poverty adversely affect the economy’. ‘Situation of derpesion in the world economy may lead to unemployment.’

Question 42. Draw a Production Possibility Curve. What does a point below this curve indicate?
Answer: Production possibility curve graphically represents the various combinations of two goods which can be produced with a given amount of resources assuming that the resources are fully employed and more efficiently used.

In the adjoining diagram, production possibility curve between cloth and wheat has been drawn. It is generally concave to the origin. Points A, B anc C which lies on PPC represent the situation when the given resources are fully employed.

Any point below this curve indicates that the resources are not fully and efficiency used:

Question 43. What is opportunity cost? Explain with the help of a numerical example?
Answer: Opportunity cost in the value of the next best alternative in choosing an alternative.
For example, Suppose to produce one unit of good X, the producer has to sacrifice production of 2 units of X, then 2X is the opportunity cost producing one unit of X.

Question 44. Distinguish between a centrally planned economy and market economy.
Answer: A centrally planned economy is an economy in which all means of production are owned by the whole community and all economic decisions are taken by the central planning authority. The central planning authority may achieve particular allocation of resources and a consequent distribution of final goods and services which is thought desirable for society as a whole.

A market economy is an economy in which all economic activities are organised through the market. In a market economy, all goods and services come with price which is mutually expressed upon by the buyers and sellers at which the exchanges take place. In a market economy, the central problems regarding what do produce and how much to produce are solved through market forces of demand and supply.

Question 45. What is meant by Consumers Equilibrium? State its condition in case of a single commodity.
Answer: A consumer is said to be in equilibrium, when he is spending his given income on various goods in such a way that maximises his satisfaction.

Condition of consumer’s equilibrium in case of a single commodity: Consumer’s equilibrium in case of a single commodity is attained when the marginal utility of the commodity measured in terms of money is equal to this price. Symbolically,
MU_x = P_x

Question 46. Explain the law of demand with the help of a demand schedule.
Answer: Law of demand states that there is an inverse relation between the price of a commodity and its quantity demanded assuming all other factors affecting demand remain constant. It means that when the price of a goods falls, the demand for the goods rises and when price rises the demand falls.

Law of demand may be explained with the help OT the following demand schedule and demand curve:

The above table and diagram show that as the price of the goods reduces from ₹ 5 to ₹ 4, the demand for a goods increases from 100 to 200 units.

Question 47. Define an indifference map. Why does an difference curve to the right show more utility? Explain.
Answer: An indifference map is the set of indifference curves. An I_c to the right shows more goods available to the consumer. By the assumption of monotonic preferences, more goods mean more utility.

Question 48. Distinguish between Money Flow and Real Flows.
Answer: Real Flow: Real flow of income implies the flow of factor services (like land, labour, capital, etc.) from the household sector to the producing sector and the corresponding flow of goods and services from the producing sector to the household sector.

Above fig. explains that household sector being the owners of factors of production supply factor service to the producers and in return producers supply goods and services to the household sector.

In other words, flow of producer refers to the flow of goods and services and this flow of product is termed as ‘real flow’.

Money Flow: Flow of income refers to money flow. Household gets income from commercial firms for their services and firms get income from household which they spend in attaining goods and services. This cycle showing income flow is referred as money flow.

Above fig., money flow model shows that household get factor income (rent, wage, interest, etc.) for providing their services and in return household sector incurs expenditure for acquiring goods and services.

Question 49. What is Net National Product?
Answer: Net National Product: Net National Product at Factor Cost (NNP_FC) or national income is the sum total of factor incomes (Rent + Interest + Profit + Wages) generated within the domestic territory of a country, along with net sector income from abroad during a year.

NNP_FC is the sum total of sector incomes earned by normal residents of a country during a year.
NNP_FC = NDP_FC + Net Factor Income from Abroad
NNP_FC is a domestic variable and hence, for converting it into NNP_FC, net factor income from abroad is added in it.

Question 50. Give the meaning of nominal GDP and Real GDP. Which of these is the indicator of economic welfare?
Answer:

1. Nominal GDP value the current year’s output in an economy at current year prices.
2. Read GDP values the current year’s output in an economy at base year prices.
3. Real GDP is the indicator of economic welfare.

Question 51. Distinguish between National Income at Current Price and Constant Price.
Answer: The main differences between the two are:
(i) National income at current prices is the sum total of market value of all final goods and services produced by an economy during a year estimated at current prices of that year. On the other hand, national income at constant prices is the sum total of market value of all final goods and services produced by an economy during the year but estimated at the price of same base year.

(ii) National income at current prices can increase even when there is no flow of goods and services in the economy but only the current prices increase. But national income at constant prices will increase only when there is an increase in the flow of goods and services. Thus national income at constant prices is more appropriate index of growth.

Question 52. Distinguish betwen GDP and GNP.
Answer: Distinction between GDP and GNP follows as:

Gross Domestic Product (GDP)	Gross National Product (GNP)
1. GDP refers to the money value of all the final goods and services produced within the domestic territory of a country.	1. GNP refers to market value or final goods and services produced by normal residents of a country.
2. GDP is a territorial concept as it is confined to domestic territory of a country.	2. GNP is a national concept as it is related to normal residents of a country.
3. It does not include net factor earning from abroad. GNP = GDP + NFYA (NFYA indicates Net Factor Income from Abroad)	3. It does include the income from net factor earning from rest of the world. GNP = GDP + NFYA
4. GDP is a smaller concept, limited to domestic territory.	4. GNP is a wider concept as it includes factor income received from abroad.

Question 53. Giving reason explain how should the following he treated in estimating national income:
(i) Expenditure on fertilizers by a farmer.
(ii) Purchase of tractor by a farmer.
Answer:
(i) It is not included in national income because it is a intermediate good.
(ii) It is included in national income because it is final good.

Question 54. What is National Income?
Answer: National Income: Net National Product at Factor Cost (NNPFC) is known as National Income. NNPFC is the sum total of net domestic product at factor cost and net factor income from abroad.
NI = Rent + Wages + Salary + Interest + Profit

Question 55. Machine purchased is always a final good. Do you agree? Give reason for your answer.
Answer: Whether ‘Machine’ is a final goods or not depends on how it is being used:
If the machine is bought by a household, then it is a final goods.
If the machine is bought by a firm for its own use then also it is a final goods.
If the machine is bought by a firm for resale then an intermediate goods.

Question 56. Define Commercial Hank.
Answer: Commercial Bank: Definitions: Commercial banks perform general banking functions. A commercial bank is an institution which deals with money and credit. It accepts deposits from the public, makes the funds available to those who need them and helps in remittance of money from one place to another.

1. According to Banking Regulation Act, “Banking means the accepting for the purpose of lending and investment of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.”

2. According to Horace White, “Bank is a manufacturer of credit and a machine for facilitating exchanges.”

3. According to Crowther, “A banker is a dealer in debts his own and other people’s. The banker’s business is then to take the debts of other people, to offer his own in exchange and thereby to create money.”

4. According to Webster’s Dictionary, “An institution with trades in money, establishment for the deposit, custody and issue of money as also for making loans and discount and facilitating the transmission of remittance from one place to another.”

Question 57. What are Primary Functions of Money?
Answer: Primary Functions of Money: Primary functions of money are also called prime functions. These functions are of prime importance and common to all countries during all the periods. Money has two prime functions:

1. Medium of Exchange: Money acts as a medium of exchange. In modern days, exchange is the basis of entire economy and money makes this exchange possible. At present, money is the most liquid means of exchange. In old age, barter system was in practice in which goods were exchanged for goods but due to lack of double coincidence, exchange was difficult. But the use of money has removed this difficulty. In modern times, money performs all functions of exchange in the economy.

2. Measure of Value: Money acts as a unit of measure of value. In other words, it acts as a yardstick of standard measure of value of which all other things can be measured. In barter system, the general measurement of value was absent and consequently it was difficult to measure the value of exchange.

In modern times, the value of every commodity can be measured in money. With the use of money, economic calculations for measuring value have become simplified.

Question 58. Explain the ‘standard of deferred payment’ function of money.
Answer: Standard of Deferred Payment: Deferred payments are those payments which are to be made in future. Money performs the function of being the unit in terms of which deferred or future payments are made. If a loan in taken today it would be paid back after a period of time. A big number of credit transactions which involve future payments are made daily. The value of money remains more or less stable.

Question 59. How does money solve the problem of double coincidence of wants?
Answer: Double coincidence of wants means what one person wants to sell and buy must coincide with what some other person wants to buy and sell. It was very difficult that such confidence of wants may take place. Money has removed this difficulty. You can sell your goods for money to whosoever wants it and with this money you can buy what you want from whosoever wants to sell that.

Question 60. Explain the significance of the store of value function of money.
Answer: Store of value implies store of wealth. Storing of wealth has become considerably easy with the introduction of money. It was not government to store value in the barter system of exchange because goods tends to wear up or perish. Stored wealth is a reserve for future investment.

Question 61. Explain the functions of a Central Bank as a banker to the governments.
Answer: The Central Bank acts as a banker to the Central government and State government. It carries out all the banking business of the government. It accepts receipts and makes payments for the government. It provides short term credit to the government. It also advises the government on banking and financial matters.

Question 62. Explain the ‘lender of last resort’ function of the Central Bank.
Answer: Lender of the last resort. As a supreme bank of the country and the bankers banks the Central Bank act as lender of the last resort. In other words, whether times of difficulties, commercial banks are not able to meet their financial requirements from other sources, they can act as a lender of last resorts approach the central bank for financial accommodation. The central bank provides financial accommodation to the commercial banks by discounting their eligible securities and exchange bills.

Question 63. Explain Banker’s Bank function of Central Bank.
Answer: Commercial Bank have same relation with Central Bank and customer have dealings with Commercial Banks. Central Bank helps them, at the time of financial crisis therefore known as lender of last-resort. With this function, it inspires confidence in Commercial Banks. Central Bank Provides additional funds to Commercial Banks at the time of difficulty.

Question 64. Can an economy be in equilibrium when there is unemployment in the economy. Explain.
Answer: An economy is in equilibrium when aggregate demand and aggregate supply are equal. Aggregate demand may not be sufficient for aggregate supply at full employment. This means aggregate demand is only sufficient to support aggregate supply at less than full employment leave. So the would be equal at less than full employment. Thus the economy can be in equilibrium.

Question 65. What is meant by Aggregate Demand?
Answer: Aggregate Demand: The total demand of goods and services in an economy is termed as ‘aggregate demand’ which is expressed in terms of total expenditure made in the economy. Thus, aggregate demand in an economy is measured in terms of total expenditure on goods and services.

In other words, aggregate demand refers to total expenditure that the residents of a country are ready to incur on the purchase of goods and services at given level of income.

Aggregate Demand = Consumption Expenditure + Investment Expenditure
AD = C + I

Question 66. What are the main components of the Capital Budget?
Answer:
1. Recovery of Loans: The Central Government offers loans to the state governments, union territories, local bodies, etc., to cope with their financial requirements. The loans are recovered by the Central Government from the borrowers and they form a part of capital receipts. These recoveries reduce financial assets of the government.

2. Loans and Borrowings: Sometimes the government borrows funds from different sources to meet its financial requirements. These borrowings create liabilities for the government. The government may borrow funds from general public, Reserve Bank of India, foreign governments and other bodies.

3. Disinvestment of Equity Holding in Public Sector Enterprise: Disinvestment is means the funds received by the government from the sale of the part of the whole of equity shares of the public enterprises to others. Such receipts are called capital receipts because it causes reduction in assets of the government.

Question 67. Define Characteristics of Tax.
Answer: Characteristics of Tax:

1. A tax is a compulsory contribution. Everyone has to pay a tax upon whom it is levied by the state. Refusal to pay a tax is subject to punishment.
2. It is the duty of the tax payer to pay the tax if he is liable to pay it.
3. Revenue received from tax payers may not be incurred for their benefit alone, but for the general and common benefit.
4. Since public expenditure is done for the common benefit and the benefit may not be in proportion of payment of tax.
5. A tax may be imposed on an individual or property or commodities, but it is actually paid by individuals.
6. It is a legal collection.

Question 68. Are fiscal deficits necessarily inflationary?
Answer: All fiscal deficits are not necessarily inflationary. If the fiscal deficit results in higher demand and. greater output, the fiscal deficit will not be inflationary. But in opposite circumstances, it becomes inflationary.

Question 69. Explain the concept of fiscal deficit in a government budget. What does it indicate?
Answer: Fiscal deficit: It refers to the excess of total budget expenditure (Revenue exp. + Capital exp.) over total budget receipt excluding borrowing. In this way it indicates borrowing requirements of the government during the current year.

Question 70. Distinguish between revenue expenditure and capital expenditure with one example of each.
Answer: Distinguish between Revenue expenditure and Capital expenditure

Question 71. Discuss the issue of deficit reduction.
Answer: The deficit in a government budget can be reduced (or contained), through the following steps:

• Taxes should be increased: Government can make a plan for raising direct taxes to increase its receipts. The government receipts can also be raised by increasing rates of taxes or by imposing new taxes.
• Reduction in government expenditure: It can be done through making government activities more efficient through better planning of programmes and better administration.
• The government can raise receipts through the sale of shares in PSUs.
• Changing the scope and role of government by withdrawing from some areas where it operated before.
• The government can encourage the private sector to undertake capital projects to reduce its expenditure.

Question 72. Explain the term ‘Development’ and ‘Non-development’ Expenditure of government. Give two examples of each.
Answer: Public expenditure may be classified as development expenditure and non-development expenditure.

Development Expenditure: This type of expenditure increase the economic growth of the country. It includes expenditure mostly on productive and welfare activities and schemes like education, public health, social security, agriculture, irrigation, industries, tourism and foreign trade, etc. Loans and grants given to states and union territories are also examples of development expenditure.

Non-development Expenditure: This type of expenditure is not concerned with the economic development activity. This type of expenditure includes the expenditure on general services like administration of state, collection of taxes, minting of coins and printing of notes, etc. Expenses on debt repayment like interest payment, pension and defence services, etc. are also examples of non-development expenditure.

Question 73. Distinguish between revenue expenditure and capital expenditure in a government budget. Give two examples of each.
Answer: Revenue expenditure is the expenditure which does not lead to any creation of assets or reduction in liabilities.
Examples: Expenditures on salaries, interest etc.

Capital expenditure is the expenditure that leads to creation of assets or leads to production in liabilities.
Examples: Expenditure on buildings, shares etc.

Question 74. Balance of payments is always Balanced. Why?
Answer: Balance of Payments is always Balanced: Balance of payments of a country is always balanced because entries in BOP account arc done on the basis of Credit (or Receipt) and Debit (or Payment) in dual entry system. After filling all the entries in the record, total credit and debit become equal to each other because both the sides are equal in transactions and recorded opposite direction. That is why, BOP is always balanced.

Question 75. Explain the effect of depreciation of domestic currency on exports.
Answer: Depreciation of domestic currency mean a fall in the price of domestic currency (say ₹) in terms of a foreign currency (say $). It means one $ can be exchanged for more rupees. So with the same amount of dollars more of goods can be purchased from India. It means exports to USA have become cheaper: They may result in increase of exports of USA.

Question 76. Explain the effect of appreciation of domestic currency on imports.
Answer: Appreciation of domestic currency means a rise in the price of domestic currency (say ₹) in terms of a foreign currency (say $). It means one ₹ can be exchange for more can be purchased from USA. If means imports from USA have become cheaper. They may result in increase of imports (from USA).

Question 77. What is demand?
Answer: Demand refers to the quantities of a commodity that the consumers are able and willing to buy at each possible price of the commodity during a given period of time.

Question 78. Distinguish between fixed costs and variable cost.
Answer: 
Fixed costs:

• Fixed costs do not change with change in quantity of output.
• Fixed costs remain the some whether output is zero or maximum.
• Examples are (a) rent (b) wages of permanent staff, (c) licenced fee, (d) cost of plant and machinery etc.

Variable cost:

• Variable costs change with change in quantity of output
• Variables costs are zero when output is zero. These costs increase when output increases and decreases when output decreases.
• Examples are (a) cost of raw material (b) wages of casual labour, expenses, on electricity etc.

Question 79. Define Net National Product.
Answer: Net National Product at factor cost (NNP_FC) is the sum total of factor income (rent + interest + profit + wages) generated within the domestic territory of a country along with net factor income from abroad during a year. NNP_FC is the sum total of factor incomes earned by normal residents of a country during a year. NDP_FC + Net factor income from abroad = NNP_FC.